Page 307 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 24: Fiscal Federalism in India
Pavitar Parkash Singh, Lovely Professional University

Unit 24: Fiscal Federalism in India Notes

CONTENTS
Objective
Introduction
24.1 Fiscal Federalism in India
24.2 Meaning and Scope of Fiscal Policy
24.3 Summary
24.4 Key-Words
24.5 Review Questions
24.6 Further Readings

Objectives

After reading this Unit students will be able to:
• Discuss about the Fiscal Federalism in India.
Introduction

To build a strong united India, India has adopted federalism. It has been done in order to actualise
and uphold the values of national unity, cultural diversity, democracy, regional autonomy and rapid
socio economic transformation through collective efforts. The Commission on Centre State Relations
chaired by Justice R.S. Sarkaria which reported in 1988 has discussed the diverse political, economic
and juridical aspects of federal fiscal relations. As a reaction to over-centralisation in the past decades,
the States have been asking for greater freedom in the exercise of economic powers. Besides, the
current policy of decentralising economic decision-making through liberalisation can aggravate
regional disparities and here the Centre has an important role to play. At the same time, the less
developed States will have to make corrections in their policies to attract investment, otherwise there
are going to be more disparities. The Constitution envisages that fiscal resources would be transferred
to the States on the recommendations of the Finance Commission. The capital resources for planned
development are now transferred on the recommendations of the Planning Commission. The National
Development Council, considers questions of national developmental policy and recommends
measures for the implementation of the objectives and targets set out for the national plans. These
institutions are expected to play a very effective role as adequate forum of consultation and co-operation
between the States and Union, but within a centralised framework.
24.1 Fiscal Federalism in India

The India Constitution has divided the powers in various fields between the Central Government
and States. For instance, in the financial field, it has very elaborate provisions. It may be noted that
the financial relations between the Centre and States are among the most difficult problems in a
federation. It seems to be more logical if we opt for complete separation of taxation powers but
according to K. Santhanam, it has given rise to a new set of difficult problems regarding transfer of
funds from the Centre to the States. In India, there are three main principles : the Centre as well as the
States should be autonomous in their finances; (i) they should be able to obtain enough funds; and (ii)
the receipts should grow. However, the reconciliation of these principles is never easy. Today, what
is needed is a functional and not a political or ideological approach.

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